Trish Regan: Italy to include sex, drugs in GDP

The mafia has long been one of Italy's biggest businesses and now, it's about to get some credit for it.

This is GDP — served Italian style.

Italy is changing how it calculates its gross domestic product, a measurement of the overall economy, to include black market activity — everything from prostitution to illegal drug sales to smuggling and arms trafficking. Economists predict illegal sales will add 1.3 percentage points to GDP this year.

Hey, it's one way to boost growth.

It could also backfire. After the criticism Italy received for former Prime Minister Silvio Berlusconi's indiscretions and fraud conviction, the country isn't improving its image.

By including the black market, for which there are no concrete ways to measure and accurately determine value, the Italian government will be able to manipulate its GDP numbers in a way that's bound to open it to criticism and agitate its Northern neighbors. Simultaneously, investors will learn to dismiss, or at least, discount, Italy's statistics, since they won't be regarded as "real."

The reason Italy is becoming creative with its accounting is because it wants to (and the European Union needs it to) improve its appearance.

A larger overall economy will enable Italy to lower its debt-to-GDP ratio, which is an essential part of meeting the EU's financial standards. EU countries are not supposed to let their yearly bills reach more than 3% of the overall economy (or their debt exceed 60% of GDP.) If they do, they're hit with hefty fines.

The other benefit of lowering the debt-to-GDP ratio, is that Italy should theoretically be able to borrow more money. Or maybe not.

Think of it like this: If a family's annual income goes up, it could qualify for a bigger mortgage. But if income went up because the family robbed a bank, the family's credit worthiness wouldn't be enhanced.

Former Italian Prime Minister Silvio Berlusconi smiles at supporters on May 22 in Rome where he holds a rally to support the party's candidates for the upcoming European elections.(Photo: Andreas Solaro, AFP/Getty Images)

While Italy's move may be considered unorthodox, even shady, it's not illegal. The EU seems to encourage the creative accounting; To give countries such as Italy a lifeline, new EU rules require member states to include the value of all income-producing activity in GDP calculations — and illegal activity is often income-producing. Italy is the first and only country to take advantage. Others, such as Spain (for which 20% of the overall economy is believed to be black market), and Greece, may soon follow.

The beauty of the black market, at least if you're the borrower, is that its value can be interpreted however you want.

In the U.S., for example, the illegal marijuana business is estimated to be worth between $10 billion and $100 billion a year. That's a big spread, and it all has to do with how an economist measures the numbers. If you're an economist in Italy who needs to make the country's economy look bigger, no doubt you'll want to go with the liberal calculation. The truth is, no one really knows.

Italy isn't the first country to recalibrate its numbers. Boosting GDP is part of a growing trend worldwide. Last month, Nigeria declared itself the biggest economy on the continent of Africa by recalculating GDP. Ghana added 60% to its economy in 2010 by establishing new GDP accounting rules. Even the U.S. managed to tack on an additional $504 billion to our economy last year by giving credit to Hollywood and creative industries.

Of course, the U.S. doesn't yet include illegal drugs and prostitution.

This isn't the first time Italy has embraced aggressive GDP accounting. In 1987, it chose to include unreported off-the-books businesses, and that enabled its economy to grow by a staggering 18%. The move allowed Italy to briefly overtake the United Kingdom in economic growth — and was officially dubbed il sorpasso (overtaking). While it boosted national pride (what Italian doesn't want to trump a Brit?), it meant little in terms of actual economic change.

This time, Italians may be able to celebrate their newly improved economic growth.